UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 3, 2013
or
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 0-20269
ALCO STORES, INC.
(Exact name of registrant as specified in its charter)
| Kansas | 48-0201080 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 751 Freeport Parkway | ||
| Coppell, TX | 75019 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number including area code: (469) 322-2900
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer o | Smaller reporting company x |
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
Common Stock, $0.0001 par value, outstanding as of December 17, 2013: 3,258,163 shares
| PART I | FINANCIAL INFORMATION | ||
| Item 1. | 3 | ||
| 3 | |||
| 4 | |||
| 5 | |||
| Item 2. | 10 | ||
| Item 3. | 18 | ||
| PART II | OTHER INFORMATION | ||
| Item 1. | 18 | ||
| Item 1A. | 19 | ||
| Item 2. | 19 | ||
| Item 3. | 20 | ||
| Item 4. | 20 | ||
| Item 5. | 20 | ||
| Item 6. | 20 | ||
| 24 | |||
PART I – FINANCIAL INFORMATION
(dollars in thousands, except share data)
November 3, 2013 | February 3, 2013 | |||||||
| Assets | (Unaudited) | |||||||
| Current assets: | ||||||||
| Cash | $ | 2,972 | $ | 3,160 | ||||
| Receivables | 12,125 | 13,187 | ||||||
| Inventories | 194,101 | 166,671 | ||||||
| Prepaid expenses | 4,005 | 3,767 | ||||||
| Deferred income taxes | — | 3,081 | ||||||
| Property held for sale | 568 | 568 | ||||||
| Total current assets | 213,771 | 190,434 | ||||||
| Property and equipment, at cost: | ||||||||
| Land and land improvements | 5,648 | 5,648 | ||||||
| Buildings and building improvements | 10,499 | 10,499 | ||||||
| Furniture, fixtures and equipment | 78,118 | 74,066 | ||||||
| Transportation equipment | 988 | 988 | ||||||
| Leasehold improvements | 21,138 | 21,138 | ||||||
| Construction work in progress | 9,360 | 5,083 | ||||||
| Total property and equipment | 125,751 | 117,422 | ||||||
| Less accumulated depreciation and amortization | 87,537 | 81,794 | ||||||
| Net property and equipment | 38,214 | 35,628 | ||||||
| Property under capital leases | 26,972 | 26,972 | ||||||
| Less accumulated amortization | 12,220 | 11,476 | ||||||
| Net property under capital leases | 14,752 | 15,496 | ||||||
| Deferred income taxes — non current | — | 1,693 | ||||||
| Other non-current assets | 2,288 | 624 | ||||||
| Total assets | $ | 269,025 | $ | 243,875 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Current maturities of capital lease obligations | $ | 537 | $ | 580 | ||||
| Accounts payable | 66,800 | 39,220 | ||||||
| Accrued salaries and commissions | 2,907 | 3,111 | ||||||
| Accrued taxes other than income taxes | 6,182 | 5,046 | ||||||
| Self-insurance claim reserves | 4,118 | 4,429 | ||||||
| Other current liabilities | 5,158 | 4,429 | ||||||
| Total current liabilities | 85,702 | 56,815 | ||||||
| Notes payable under revolving loan | 77,995 | 63,446 | ||||||
| Capital lease obligations - less current maturities | 15,497 | 15,936 | ||||||
| Deferred gain on leases | 2,763 | 3,053 | ||||||
| Other noncurrent liabilities | 2,376 | 2,462 | ||||||
| Total liabilities | 184,333 | 141,712 | ||||||
| Stockholders’ equity: | ||||||||
| Common stock, $.0001 par value, authorized 20,000,000 shares; 3,258,163 shares issued and outstanding, respectively | 1 | 1 | ||||||
| Additional paid-in capital | 36,868 | 36,533 | ||||||
| Retained earnings | 47,823 | 65,629 | ||||||
| Total stockholders’ equity | 84,692 | 102,163 | ||||||
| Total liabilities and stockholders’ equity | $ | 269,025 | $ | 243,875 | ||||
See accompanying notes to unaudited financial statements.
(dollars in thousands, except share data)
(Unaudited)
| Thirteen Week Periods Ended | Thirty-Nine Week Periods Ended | |||||||||||||||
November 3, 2013 | October 28, 2012 | November 3, 2013 | October 28, 2012 | |||||||||||||
| Net sales | $ | 106,661 | $ | 105,918 | $ | 343,172 | $ | 338,188 | ||||||||
| Cost of sales | 78,740 | 72,974 | 242,826 | 232,844 | ||||||||||||
| Gross margin | 27,921 | 32,944 | 100,346 | 105,344 | ||||||||||||
| Selling, general and administrative | 35,032 | 31,831 | 102,684 | 96,775 | ||||||||||||
| Depreciation and amortization expenses | 2,112 | 2,177 | 6,439 | 6,356 | ||||||||||||
| Total operating expenses | 37,144 | 34,008 | 109,123 | 103,131 | ||||||||||||
| Operating earnings (loss) | (9,223 | ) | (1,064 | ) | (8,777 | ) | 2,213 | |||||||||
| Interest expense | 852 | 859 | 2,862 | 2,395 | ||||||||||||
| Loss from continuing operations before income taxes | (10,075 | ) | (1,923 | ) | (11,639 | ) | (182 | ) | ||||||||
| Income tax expense (benefit) | 5,981 | (779 | ) | 5,395 | (89 | ) | ||||||||||
| Loss from continuing operations | (16,056 | ) | (1,144 | ) | (17,034 | ) | (93 | ) | ||||||||
| Loss from discontinued operations, net of income tax benefit of $354, $140, $471, and $354 respectively | (579 | ) | (229 | ) | (772 | ) | (580 | ) | ||||||||
| Net loss | $ | (16,635 | ) | $ | (1,373 | ) | $ | (17,806 | ) | $ | (673 | ) | ||||
| Loss per share | ||||||||||||||||
| Basic | ||||||||||||||||
| Continuing operations | $ | (4.93 | ) | $ | (0.31 | ) | $ | (5.23 | ) | $ | (0.02 | ) | ||||
| Discontinued operations | (0.18 | ) | (0.06 | ) | (0.24 | ) | (0.15 | ) | ||||||||
| Net loss per share | $ | (5.11 | ) | $ | (0.37 | ) | $ | (5.47 | ) | $ | (0.17 | ) | ||||
| Loss per share | ||||||||||||||||
| Diluted | ||||||||||||||||
| Continuing operations | $ | (4.93 | ) | $ | (0.31 | ) | $ | (5.23 | ) | $ | (0.02 | ) | ||||
| Discontinued operations | (0.18 | ) | (0.06 | ) | (0.24 | ) | (0.15 | ) | ||||||||
| Net loss per share | $ | (5.11 | ) | $ | (0.37 | ) | $ | (5.47 | ) | $ | (0.17 | ) | ||||
See accompanying notes to unaudited financial statements.
(dollars in thousands)
(Unaudited)
| Thirty-Nine Week Periods Ended | ||||||||
November 3, 2013 | October 28, 2012 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (17,806 | ) | $ | (673 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 6,537 | 6,479 | ||||||
| Loss on sale of assets | — | 4 | ||||||
| Share-based compensation expense | 335 | 327 | ||||||
| Deferred income tax expense | 4,774 | (646 | ) | |||||
| Changes in: | ||||||||
| Receivables | 1,062 | (79 | ) | |||||
| Prepaid expenses | (238 | ) | (446 | ) | ||||
| Inventories | (27,430 | ) | (35,793 | ) | ||||
| Accounts payable | 27,580 | 35,164 | ||||||
| Accrued salaries and commissions | (204 | ) | 237 | |||||
| Accrued taxes other than income | 1,136 | 819 | ||||||
| Self-insured claims reserves | (311 | ) | (214 | ) | ||||
| Income taxes payable | — | 154 | ||||||
| Other assets and liabilities | (1,312 | ) | (89 | ) | ||||
| Net cash provided by (used in) operating activities | (5,877 | ) | 5,244 | |||||
| Cash flows from investing activities: | ||||||||
| Proceeds from the sale of assets | 81 | 486 | ||||||
| Acquisition of property and equipment | (8,459 | ) | (8,485 | ) | ||||
| Net cash used in investing activities | (8,378 | ) | (7,999 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Borrowings on revolving loan credit agreement | 141,639 | 131,225 | ||||||
| Repayments on revolving loan credit agreement | (127,091 | ) | (125,288 | ) | ||||
| Principal payments under capital lease obligations | (481 | ) | (531 | ) | ||||
| Payments for repurchase of stock | — | (3,963 | ) | |||||
| Net cash provided by financing activities | 14,067 | 1,443 | ||||||
| Net decrease in cash and cash equivalents | (188 | ) | (1,312 | ) | ||||
| Cash at beginning of period | 3,160 | 2,491 | ||||||
| Cash at end of period | $ | 2,972 | $ | 1,179 | ||||
Supplemental cash flow information:
| Interest, excluding interest on capital lease obligations and amortization of debt financing costs | $ | 1,687 | $ | 1,318 | ||||
| Net income tax paid | $ | 140 | $ | 123 |
See accompanying notes to unaudited financial statements.
ALCO STORES, INC.
Notes to Unaudited Financial Statements
(dollars in thousands, except share data and per share amounts)
| (1) | Basis of Presentation |
The accompanying unaudited financial statements of ALCO Stores, Inc. (the "Company") are for interim periods and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying unaudited financial statements should be read in conjunction with the financial statements included in the Company's fiscal 2013 Annual Report on Form 10-K. In the opinion of management of the Company, the accompanying unaudited financial statements reflect all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position of the Company and the results of its operations and cash flows for the interim periods. Because the Company’s business is moderately seasonal, the results from interim periods are not necessarily indicative of the results to be expected for the entire year.
The Company’s fiscal year ends on the Sunday nearest to January 31. Fiscal 2014 is a 52-week period consisting of four thirteen week periods, with each period referred to as a quarter. Fiscal 2013 was a 53-week period consisting of three thirteen week periods and one fourteen week period. During Fiscal 2013, the fourteen week period occurred in the fourth quarter. The thirteen weeks ended November 3, 2013 and October 28, 2012 are referred to herein as the third quarter of fiscal 2014 and 2013, respectively.
Same-stores are those stores which were open at the end of the reporting period, had reached their fourteenth month of operation, and include store locations, if any, that had experienced a remodel, an expansion, or relocation. Same-stores also include the Company’s transactional website.
Non same-stores are those stores which have not reached their fourteenth month of operation.
The depreciation and amortization amounts from the Statements of Operations may not agree to the related amounts in the Statements of Cash Flows due to the fact that a portion of the depreciation and amortization is included in loss from discontinued operations, net of income tax benefit line of the Statements of Operations.
| (2) | Share-Based Compensation |
The Company recognizes compensation expense for its share-based payments based on the fair value of the awards at grant date. Share-based payments consist of stock option grants and the related compensation cost is recognized over the requisite service period of the award.
Total share-based compensation expense (a component of selling, general and administrative expenses) is summarized as follows:
| Thirteen Week Periods Ended | Thirty-Nine Week Periods Ended | |||||||||||||||
| November 3, 2013 | October 28, 2012 | November 3, 2013 | October 28, 2012 | |||||||||||||
| Share-based compensation expense before income taxes | $ | 107 | 97 | $ | 335 | 327 | ||||||||||
| Income tax benefit | (40 | ) | (39 | ) | (125 | ) | (132 | ) | ||||||||
| Share-based compensation expense net of income tax benefit | $ | 67 | 58 | $ | 210 | 195 | ||||||||||
| Effect on: | ||||||||||||||||
| Basic earnings per share | $ | 0.02 | 0.02 | $ | 0.06 | 0.05 | ||||||||||
| Diluted earnings per share | $ | 0.02 | 0.02 | $ | 0.06 | 0.05 | ||||||||||
Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.
Equity Incentive Plan
In May 2003, the stockholders approved the 2003 ALCO Stores, Inc. Incentive Stock Option Plan and such plan was amended in 2010 to permit optionees to make a cashless, net exercise of their stock options (the 2003 ALCO Stores, Inc. Incentive Stock Option Plan, as amended is hereinafter referred to as the “2003 Plan”). There are 500,000 shares of Common Stock authorized for issuance upon exercise of options under the 2003 Plan. According to the terms of the 2003 Plan, the per share exercise price of options granted shall not be less than the fair market value of the stock on the date of grant and such options will expire no later than five years from the date of grant. The options vest in equal amounts over a four year requisite service period beginning from the grant date unless certain Company events occur. In the case of a stockholder owning more than 10% of the outstanding voting stock of the Company, the exercise price of an incentive stock option may not be less than 110% of the fair market value of the stock on the date of grant and such options will expire no later than five years from the date of grant. Also, the aggregate fair market value of the stock with respect to which incentive stock options are exercisable on a tax deferred basis for the first time by an individual in any calendar year may not exceed $0.1 million. In the event that the foregoing results in a portion of an option exceeding the $0.1 million limitation, such portion of the option in excess of the limitation shall be treated as a nonqualified stock option. At November 3, 2013, the Company had 275,875 remaining shares authorized for future option grants. Upon exercise, the Company issues these shares from the unissued shares authorized. The 2003 Plan had a term of ten years and options could no longer be granted under the 2003 Plan after May 2013. Therefore, the Compensation Committee created a new stock option plan that was voted upon by the Company’s stockholders during the 2012 annual meeting to replace the 2003 Plan.
On June 27, 2012, the Company's stockholders approved the Company's 2012 Equity Incentive Plan (the "2012 Plan"), which is administered by the Compensation Committee of the Company's Board of Directors. Under the 2012 Plan, the Company may grant up to 500,000 shares of Company stock in the form of stock options, restricted stock, stock appreciation rights and other stock awards to officers, key employees and consultants of the Company and its affiliates; provided however, the Company's directors are not permitted to be participants in the 2012 Plan. The Compensation Committee has broad discretion to administer the 2012 Plan, interpret its provisions, and adopt policies for implementing purposes of the 2012 Plan. This discretion includes the power to select the persons who will receive awards, determine the form, terms and conditions of any such awards, and interpret, construe and apply such terms and conditions. According to the terms of the 2012 Plan, the per share exercise price of stock options granted shall not be less than the fair market value of the stock on the date of grant and such options will expire no later than ten years from the date of grant. The stock options, awards and rights granted under the Plan vest over a certain period of time, as determined by the Compensation Committee in its sole discretion, beginning from the grant date unless certain Company events occur as further provided under the terms of the Plan. In the case of a stockholder owning more than 10% of the outstanding voting stock of the Company, the exercise price of an incentive stock option may not be less than 110% of the fair market value of the stock on the date of grant and such options will expire no later than five years from the date of grant. Also, the aggregate fair market value of the stock with respect to which incentive stock options are exercisable on a tax deferred basis for the first time by an individual in any calendar year may not exceed $0.1 million. In the event that the foregoing results in a portion of an option exceeding the $0.1 million limitation, such portion of the option in excess of the limitation shall be treated as a non-qualified stock option. No more than 100,000 shares of the Company's stock may be awarded in a single calendar year to any individual participating in the 2012 Plan. At November 3, 2013, the Company had 392,500 remaining shares authorized for future option grants. Upon exercise, the Company issues these shares from the unissued shares authorized. The 2012 Plan will expire on June 27, 2022.
Under our Non-Qualified Stock Option Plan for Non-Management Directors (the “Director Plan”), options may be granted to Directors of the Company who are not otherwise officers or employees of the Company, not to exceed 200,000 shares. According to the terms of the Director Plan, the per share exercise price of options granted shall not be less than the fair market value of the stock on the date of grant and such options will expire five years from the date of grant. The options vest in equal amounts over a four year requisite service period beginning from the grant date unless certain Company events occur. All options under the Director Plan shall be non-qualified stock options. At November 3, 2013, the Company had 76,457 remaining shares to be issued under this plan. Upon exercise, the Company will issue these shares from the unissued shares authorized.
The fair value of each option grant is separately estimated. The fair value of each option is amortized into share-based compensation on a straight-line basis over the requisite service period as discussed above. We have estimated the fair value of all stock option awards as of the date of the grant by applying a modified Black-Scholes pricing valuation model. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of share-based compensation, including expected stock price volatility. The assumptions used in determining the fair value of options granted and a summary of the methodology applied to develop each assumption are as follows:
| Fiscal 2013 Ended | Thirteen Week Periods Ended | Thirty-Nine Week Periods Ended | ||||||||||||||||||
February 3, 2013 | November 3, 2013 | October 28, 2012 | November 3, 2013 | October 28, 2012 | ||||||||||||||||
| Stock options granted | 190,000 | — | — | 129,500 | 190,000 | |||||||||||||||
| Weighted average exercise price | $ | 9.41 | $ | — | $ | — | $ | 9.97 | $ | 9.41 | ||||||||||
| Weighted average grant date fair value (per share) | $ | 3.92 | $ | — | $ | — | $ | 4.69 | $ | 3.92 | ||||||||||
| Expected price volatility | 48.23 | % | N/ | A | N/ | A | 47.11 | % | 48.23 | % | ||||||||||
| Risk-free interest rate | 0.59 | % | N/ | A | N/ | A | 0.60 | % | 0.59 | % | ||||||||||
| Weighted average expected lives in years | 7.2 | N/ | A | N/ | A | 7.4 | 7.2 | |||||||||||||
| Dividend yield | 0.00 | % | N/ | A | N/ | A | 0.00 | % | 0.00 | % | ||||||||||
EXPECTED PRICE VOLATILITY — A measure of the amount by which a price has fluctuated or is expected to fluctuate. The Company uses actual historical changes in the market value of its stock to calculate expected price volatility because management believes that this is the best indicator of future volatility. The Company calculates monthly market value changes from the date of grant over a past period to determine volatility. An increase in the expected volatility will increase share-based compensation.
RISK-FREE INTEREST RATE — The applicable U.S. Treasury rate for the date of the grant over the expected term. An increase in the risk-free interest rate will increase share-based compensation.
EXPECTED LIVES — The period of time over which the options granted are expected to remain outstanding and is based on management’s expectations in relation to the holders of the options. Options granted have a maximum term of ten years. An increase in the expected life will increase share-based compensation.
DIVIDEND YIELD — The Company has not made any dividend payments nor does it have plans to pay dividends in the foreseeable future. An increase in the dividend yield will decrease share-based compensation.
As of November 3, 2013, total unrecognized share-based compensation expense related to non-vested stock options is $0.5 million with a weighted average expense recognition period of 2.9 years.
| (3) | Accounting for Income Taxes |
Income taxes are provided using the asset/liability method, in which deferred taxes are recognized for the tax consequences of temporary differences between the financial statement carrying amounts and tax basis of existing assets and liabilities. Deferred tax assets are reviewed for recoverability and valuation allowances are provided as necessary. The Company generally records income tax expense during interim periods based on its best estimate of the full year’s effective tax rate. However, income tax expense relating to adjustments to the Company’s liabilities for uncertainty in income tax positions for prior reporting periods are accounted for in the interim period in which it occurs. Income tax expense relating to adjustments for current year uncertain tax positions are accounted for as a component of the adjusted annualized effective tax rate.
In assessing the need for a valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. Accounting guidance states that a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome in determining whether a valuation allowance is not needed against deferred tax assets. As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses.
The Company recorded the valuation allowance on its $9.8 million net deferred tax assets during the third quarter due to losses from operations and forecasts of losses for the current year to the extent we expected to be in a cumulative loss position for the three year period ending February 2, 2014. Based on this assessment, the Company could not support the realization of its net deferred tax assets in future periods, and the remaining net deferred tax assets were written off. Management will continue to evaluate all of the positive and negative evidence in future quarters and will make a determination as to whether it is more likely than not that its net deferred tax assets will be realized in future periods. The establishment of a valuation allowance does not have any impact on cash, nor does such an allowance preclude the Company from using its loss carryforwards or utilizing other deferred tax assets in the future.
The statute of limitations for the Company’s federal income tax returns is open for fiscal 2011 through fiscal 2013. The Company files in numerous state jurisdictions with varying statutes of limitation. The Company’s state returns are subject to examination by the taxing authority for fiscal 2010 through 2013 or fiscal 2011 through fiscal 2013, depending on each state’s statute of limitations.
| (4) | Fair Value Measurements |
The financial instruments of the Company consist of cash, short-term receivables and accounts payable, accrued expenses and long-term debt instruments, including capital leases. For notes payable under revolving loan, fair value approximates the carrying value due to the variable interest rate. For all other financial instruments, including cash, short-term receivables, accounts payable and accrued expenses, the carrying amounts approximate fair value due to the short maturity of those instruments.
| (5) | Earnings Per Share |
Basic earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if contracts to issue securities (such as stock options) were exercised, except for those periods with a loss where the effect would be anti-dilutive. The weighted average number of shares used in computing earnings per share was as follows:
| Thirteen Week Periods Ended | Thirty-Nine Week Periods Ended | |||||||||||||||
| November 3, 2013 | October 28, 2012 | November 3, 2013 | October 28, 2012 | |||||||||||||
| Basic | 3,258,163 | 3,677,357 | 3,258,163 | 3,769,234 | ||||||||||||
| Diluted | 3,258,163 | 3,677,357 | 3,258,163 | 3,769,234 | ||||||||||||
| (6) | Store Closings and Discontinued Operations |
When the operation of a store is discontinued and the store is closed, the Company reclassifies historical operating results from continuing operations to discontinued operations. The Company closed four stores during the third quarter of fiscal 2014 and a total of eight stores during the thirty-nine weeks ended November 3, 2013, whereas the Company closed one store during the third quarter of fiscal 2013 and a total of four stores during the thirty-nine weeks ended October 28, 2012.
| (7) | Long-Term Debt |
On July 21, 2011, the Company entered into a five-year revolving Credit Agreement (the “Facility”) with Wells Fargo Bank, National Association and Wells Capital Finance, LLC (collectively “Wells Fargo”). The $120.0 million Facility replaced the Company’s previous $120.0 million credit facility with Bank of America, N.A. and Wells Fargo Retail Finance, LLC, and expires July 20, 2016. Additional costs paid to Wells Fargo in connection with the new facility were $0.5 million. Those fees have been deferred and will be amortized over the term of the new facility. Loan advances are secured by a security interest in the Company’s inventory and credit card receivables.
Based on the Company’s average excess availability, the amount advanced to the Company on any Base Rate Loan (as such term is defined in the Facility) bears interest at the highest of (a) the rate of interest in effect for such day as publicly announced from time to time by Wells Fargo as its “prime rate”; (b) the Federal Funds Rate for such day, plus 1.0%; and (c) the LIBO Rate for a 30 day interest period as determined on such day, plus 2.0%. Amounts advanced with respect to any LIBO Borrowing for any Interest Period (as those terms are defined in the Facility) shall bear interest at an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of one percent) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate (as defined in the Facility). The Facility contains various restrictions that are applicable when outstanding borrowings reach certain thresholds, including limitations on additional indebtedness, prepayments, acquisition of assets, granting of liens, certain investments and payment of dividends.
On October 12, 2012, subsequent to a trade confirmation executed October 10, 2012 whereby the Company repurchased shares of its Common Stock, the Company notified Wells Fargo that immediately after giving effect to the share repurchase, the Consolidated Fixed Charge Coverage Ratio would not be greater than the required ratio per Section 7.06(c) of the Facility. On October 12, 2012, Wells Fargo issued its consent of the repurchase (the “WF Consent”); provided that the WF Consent automatically terminated in the event the repurchase was not consummated within 90 days of the date of consent.
On February 6, 2013, the Board of Directors of the Company unanimously approved a First Amendment (the “Amendment”) to its Credit Agreement with Wells Fargo National Association, amending Section 7.06(c) of the Credit Agreement to permit the Company, subject to certain conditions set forth in the Amendment, to repurchase, redeem or otherwise acquire Equity Interests issued by the Company not to exceed $1.0 million in the aggregate in each fiscal year. Under the Credit Agreement, “Equity Interests” is defined as all of the shares of the capital stock of a person and all of the other warrants, options or other rights of a person to purchase capital stock of such person. Such amendment was announced on Form 8-K filed by the Company with the Securities and Exchange Commission on February 12, 2013 and a copy of the Amendment is attached to such 8-K. Except to the extent specifically set forth in the WF Consent and the Amendment, no other consent, waiver of, or change in any of the terms, provisions or conditions of the Credit Agreement is intended or implied.
Notes payable outstanding at November 3, 2013 and October 28, 2012 under the revolving loan credit facility aggregated $78.0 million and $58.0 million, respectively. The lender had also issued letters of credit aggregating $8.8 million and $8.6 million, respectively, at such dates on behalf of the Company. The interest rates on the outstanding borrowings at November 3, 2013 were 2.19% on $67.0 million of the outstanding balance and 4.25% on the remaining $11.0 million. The Company had additional borrowings available at November 3, 2013 under the revolving loan credit facility amounting to approximately $33.2 million.
Interest expense on notes payable and long-term debt, excluding capital lease obligations and amortization of debt financing costs, aggregated $0.5 million and $0.5 million during the third quarter of fiscal 2014 and fiscal 2013, respectively. Interest expense on notes payable and long-term debt, excluding capital lease obligations and amortization of debt financing costs, aggregated $1.7 million and $1.3 million during the thirty-nine weeks ended November 3, 2013 and October 28, 2012, respectively.
On November 22, 2013, pursuant to Section 2.16 of the Facility, the Board of Directors unanimously approved to request to increase the revolving credit commitments of the Company by $10.0 million (the “Commitment Increase”); thereby, increasing the overall Facility from $120.0 million to $130.0 million. Except for the Commitment Increase, the Facility remains unchanged and in full force and effect.
| (8) | Stock Repurchase |
On July 27, 2012, the Company entered into a new Rule 10b5-1 and Rule 10b-18 Stock Repurchase Agreement with William Blair and Company, LLC (the “Stock Repurchase Agreement”) whereby the Company authorized the repurchase of up to 175,000 shares of the Company’s Common Stock under the Company’s stock repurchase program (the “Program”).
The Program was initially authorized by the Company on March 23, 2006, whereby the Board of Directors of the Company authorized the repurchase of 200,000 shares of the Company's Common Stock, and the Company repurchased 3,337 shares of Common Stock under the Program. The Company's Board of Directors reinstated the Program on August 13, 2008 and the Company repurchased 22,197 shares of Common Stock under the Program during such period of reinstatement. The Board of Directors of the Company approved the reinstatement of the Program again on January 6, 2012 and the Company repurchased an additional 34,407 shares of Common Stock during such reinstatement. On April 25, 2012, the Board of Directors of the Company authorized the Company to repurchase an additional 500,000 shares of Common Stock for a total of 700,000 shares of Common Stock authorized for repurchase under the Program. The Stock Repurchase Agreement only authorizes William Blair and Company, LLC to repurchase a portion of the total shares available for repurchase under the Program as stated above. Under the terms of the Program, the Company can terminate the proposed buy back at any time.
There were no shares repurchased by the Company during the third quarter of fiscal 2014. During fiscal 2013, the Company repurchased a total of 584,928 shares of Common Stock under the Program. All shares were repurchased at market prices and the Company’s policy is to apply the excess of purchase price over par value to additional paid-in capital, resulting in a decrease to additional paid-in capital of $4.0 million. As of November 3, 2013, the Company had repurchased a total of 610,462 shares under the Program since it was initially approved in 2006. Therefore, there were 89,538 shares of Common Stock available to be repurchased by the Company, as of November 3, 2013.
| (9) | Merger Agreement |
On July 25, 2013, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Mallard Parent, LLC, (“Parent”) and M Acquisition Corporation, (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent. Parent and Acquisition Sub are beneficially owned by an affiliate of Argonne Capital Group, LLC (the “Sponsor”). The merger consideration was $14.00 per share in cash, without interest, and was to be supported through financing to be obtained by the Sponsor.
Under the Merger Agreement, each share of the Company’s common stock issued and outstanding immediately prior to the effective time of the Merger (other than shares, if any, owned by Parent, Merger Sub, the Company, or any other direct or indirect wholly owned subsidiary of Parent, Merger Sub, or the Company) would have been converted into the right to receive $14.00 per share in cash, without interest.
The Merger was subject to the approval by at least a majority of all outstanding shares of common stock. The Merger was also subject to various other customary conditions, including the absence of any governmental order prohibiting the consummation of the transaction contemplated by the Merger Agreement, the accuracy of the representations and warranties contained in the Merger Agreement, and compliance with the covenants and agreements in the Merger Agreement in all material respects.
The Company was subject to customary “non-solicitation” provisions that limit its ability to solicit, encourage, discuss or negotiate alternative acquisition proposals from third parties or to provide non-public information to third parties. These non-solicitation provisions were subject to a “fiduciary out” provision that allows the Company to provide non-public information and participate in discussions and negotiations with respect to certain unsolicited written acquisition proposals and to terminate the Merger Agreement and enter into an alternative acquisition agreement with respect to a superior proposal in compliance with the terms of the Merger Agreement, provided that the Company’s Board of Directors has concluded that the failure to do so would be inconsistent with its fiduciary obligations under applicable law.
The Merger Agreement contained certain termination rights, including the Company’s right to terminate the Merger Agreement to accept a superior proposal, and provided that, upon termination of the Merger Agreement by the Company under specified conditions, a termination fee would have been payable by the Company. In such circumstances, the Company would have been required to pay Sponsor $2.25 million.
Subject to approval by at least a majority of all outstanding shares of common stock, the proposed Merger was expected to close before the end of the 2013 calendar year.
On October 30, 2013, the Company held a special meeting of its stockholders to vote on the proposal to adopt the Merger Agreement. The proposal to adopt the Merger Agreement did not receive approval from more than a majority of the outstanding share of the Company’s common stock, and therefore was not approved by the Company’s Stockholders. As a result of the failure to receive such stockholder approval, on October 30, 2013, the Company delivered to parent and Merger Sub a written notice (the “Termination Notice”) terminating the Merger Agreement in accordance with Section 7.2(b) of the Merger Agreement. As a result of the Termination Notice, the Merger Agreement was terminated and the merger contemplated was abandoned. Because the Termination Notice was delivered because of the failure of the Company’s stockholders to approve the Merger Agreement, no termination fee was paid by either party.
Merger related costs for the thirty-nine weeks ended November 3, 2013, included in SG&A Expenses from Continuing Operations, were $2.3 million, and include special compensation fees paid to the Company’s Board of Directors, in the amount of $0.3 million, for merger related activities.
| (10) | Legal Proceedings |
On September 5, 2013, Advanced Advisors, a Company stockholder, filed a class action petition in the District Court of Shawnee County, Kansas (case no. 13C001007) citing, among other parties, the Company and the Company’s directors, Royce Winsten, Terrence Babilla, Dennis Logue, Lolan Mackey, and Richard Wilson, as defendants. The petition challenges the defendants’ actions in causing the Company to enter into the Merger Agreement under which Argonne Capital Group, LLC was to purchase all of the outstanding shares of the Company. The allegations against the defendants include breaches of fiduciary duties and the aiding and abetting of breaches of fiduciary duties. The amount of the damages is unspecified. The Company intends to vigorously defend itself.
On September 23, 2013, Paul Hughes, an individual Company stockholder, filed a class action petition in the District Court of Shawnee County, Kansas (case no. 13C001096) citing, among other parties, the Company and the Company’s directors, Royce Winsten, Terrence Babilla, Dennis Logue, Lolan Mackey, and Richard Wilson, as defendants. The petition challenges the defendants’ actions in causing the Company to enter into the Merger Agreement under which Argonne Capital Group, LLC was to purchase all of the outstanding shares of the Company. The allegations against the defendants include breaches of fiduciary duties and the aiding and abetting of breaches of fiduciary duties. The amount of the damages is unspecified. There is a dismissal hearing for this matter scheduled for January 10, 2014. The Company intends to vigorously defend itself.
On September 27, 2013, Jeffery R. Geygan, an individual Company stockholder, filed a class action petition in the District Court of Shawnee County, Kansas (case no. 13C001120) citing, among other parties, the Company and the Company’s directors, Royce Winsten, Terrence Babilla, Dennis Logue, Lolan Mackey, and Richard Wilson, as defendants. The petition challenges the defendants’ actions in causing the Company to enter into the Merger Agreement under which Argonne Capital Group, LLC was to purchase all of the outstanding shares of the Company. The allegations against the defendants include breaches of fiduciary duties and the aiding and abetting of breaches of fiduciary duties. The amount of the damages is unspecified. The parties have filed a joint motion to consolidate this case and the case filed by Advanced Advisors discussed above. The Company intends to vigorously defend itself.
See Item I under Part II of this 10-Q for a discussion of the legal proceedings of the Company.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS
Certain statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may constitute “forward-looking statements” within the meaning of Section 21E of the Exchange Act. These statements are subject to risks and uncertainties, as described below. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, income or loss, earnings or loss per share, capital expenditures, store openings, store closings, payment or non-payment of dividends, capital structure and other financial items, (ii) statements of plans and objectives of the Company’s management or Board of Directors, including plans or objectives relating to inventory, store development, marketing, competition, business strategy, store environment, merchandising, purchasing, pricing, distribution, transportation, store locations and information systems, (iii) statements of future economic performance, and (iv) statements of assumptions underlying the statements described in (i), (ii) and (iii). Forward-looking statements can often be identified by the use of forward-looking terminology, such as “believes,” “expects,” “may,” “will,” “should,” “could,” “intends,” “plans,” “estimates”, “projects” or “anticipates,” variations thereof or similar expressions.
Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. The Company’s future results of operations, financial condition and business operations may differ materially from the forward-looking statements or the historical information stated in this Quarterly Report on Form 10-Q. Stockholders and investors are cautioned not to put undue reliance on any forward-looking statement.
There are a number of factors and uncertainties that could cause actual results of operations, financial condition or business contemplated by the forward-looking statements to differ materially from those discussed in the forward-looking statements made herein or elsewhere orally or in writing, by, or on behalf of, the Company, including those factors described below. Other factors not identified herein could also have such an effect. Factors that could cause actual results to differ materially from those discussed in the forward-looking statements and from historical information include, but are not limited to, those factors described below.
OVERVIEW
Economic conditions: The lingering economic slowdown has caused disruptions and significant volatility in financial markets, increased rates of mortgage loan default and personal bankruptcy, and declining consumer and business confidence, which has led to decreased customer traffic and reduced levels of consumer spending, particularly on discretionary items. The continuing economic recession has impacted the Company’s customers, whom the Company believes to be primarily on a fixed or low income, and has negatively affected their ability to shop in our stores and buy our products. This decline in consumer and business confidence and the decreased levels of customer traffic and consumer spending have negatively impacted our business. We cannot predict how long the current economically challenging conditions will persist and how such conditions might affect us and our customers. Decreased customer traffic and reduced consumer spending, particularly on discretionary items, would, however, over an extended period of time negatively affect our financial condition, operating performance, revenues and income. In addition, we cannot predict how current or worsening economic conditions will affect our critical suppliers and distributors and any negative impact on our critical suppliers or distributors may also have an adverse impact on our business results or financial condition.
The economic slowdown also affects the Company’s business environment. Due to lower discretionary spending by consumers and a high demand for lower cost goods, the discount retail industry has become highly competitive. This competitive environment impacts the Company because lower prices and greater markdowns on inventory are necessary to keep the Company’s position in the industry and these factors may result in lower margins and profitability.
Another factor that continues to impact the Company is severe weather. We have experienced severe weather conditions, including snow and ice storms, flood and wind damage, tornadoes and droughts in some states that have slowed consumer confidence and customer traffic.
Management does not believe that its merchandising operations, net sales, revenue or results from continuing operations have been materially impacted by inflation during the past two fiscal years.
Operations. The Company is a regional broad line retailer operating in 23 states.
For purposes of this management’s discussion and analysis of financial condition and results of operations, the financial numbers are presented in millions.
Strategy. The Company’s overall business strategy involves identifying and opening stores in locations that will provide the Company with the highest return on investment. The Company also competes for retail sales with other entities, such as mail order companies, specialty retailers, stores, manufacturer’s outlets and the internet. The Company initiated a transactional web site during November 2011. In July 2012, the Company expanded the product selection on its website which now includes more than 20,000 items of high-quality merchandise. Products offered on the ALCOstores.com website include video games and electronics, housewares, appliances and furniture, health & beauty aids, baby goods, office supplies, automotive and sporting goods, and much more. As in traditional ALCO stores, consumers can choose from a wide range of well-known brand names. In addition, the website includes brands not found in the Company’s retail stores.
During the second quarter of fiscal 2013, the Company adopted regional pricing and merchandising. Regional pricing will allow the Company to identify opportunities to price specific items differently in different markets, depending on regional competitive situations, while maintaining the Company’s superior value positioning with shoppers in each market. Regional merchandising consists of tailoring product offerings for specific needs in the Company’s regions, such as adding fire-retardant clothing in stores in oil-drilling areas and higher-end outdoor apparel in areas frequented by outdoors enthusiasts, such as Colorado and other Western states.
The Company uses a variety of broad-based targeted marketing and advertising strategies to reach consumers. These strategies include full-color photography advertising circulars of eight to 20 pages distributed through newspaper insertion or, in the case of inadequate newspaper coverage, through direct mail. During fiscal 2014, the Company will distribute approximately 48 circulars in the Company’s markets. The Company also uses in-store marketing. The Company’s merchandising and marketing teams work together to present the products in an engaging and innovative manner, which is coordinated so that it is consistent with the current print advertisements. The Company regularly changes its banners and in-store promotions, which are advertised throughout the year, to attract consumers to the stores, to generate strong customer frequency and to increase average sales per customer. Net marketing and promotion costs represented approximately 1.1% and 1.0% of net sales during the third quarter of fiscal 2014 and 2013, respectively. Net marketing and promotion costs represented approximately 1.1% and 1.1% of net sales during the thirty-six weeks ended November 3, 2013 and October 28, 2012, respectively. Management believes it has developed a comprehensive marketing strategy, intended to increase customer traffic and same-store sales. The Company continues to operate as a high-low retailer and has included in many of its marketing vehicles cross departmental products. For example, the Company has used an Elder Care page with over-the-counter products, “as seen on TV” items, and dry meals—all targeting customers who have reached retirement age. The Company believes that by providing the breadth of these key items to this targeted audience we can serve our customers’ needs more efficiently and garner a greater share of the purchases made by this demographic. The Company’s stores offer a broad line of merchandise consisting of approximately 35,000 items, including automotive, consumables and commodities, crafts, domestics, electronics, furniture, hardware, health and beauty aids, housewares, jewelry, ladies’, men’s and children’s apparel and shoes, pre-recorded music and video, sporting goods, seasonal items, stationery and toys. The Company is constantly evaluating the appropriate mix of merchandise to improve sales and gross margin performance. Corporate merchandising is provided to each store to ensure a consistent Company-wide store presentation. To facilitate long-term merchandising planning, the Company divides its merchandise into three core categories: primary, secondary, and convenience. The primary core receives management’s primary focus, with a wide assortment of merchandise being placed in the most accessible locations within the stores and receiving significant promotional consideration. The secondary core consists of categories of merchandise for which the Company maintains a strong assortment that is easily and readily identifiable by its customers. The convenience core consists of categories of merchandise for which the Company maintains convenient (but limited) assortments, focusing on key items that are in keeping with customers’ expectations for a broad line retail store. Secondary and convenience cores include merchandise that the Company feels is important to carry, as the target customer expects to find them within a broad line retail store and they ensure a high level of customer traffic. The Company continually evaluates and ranks all product lines, shifting product classifications when necessary to reflect the changing demand for products. In addition, the Company’s merchandising systems are designed to integrate the key retailing functions of seasonal merchandise planning, purchase order management, merchandise distribution, sales information and inventory maintenance and replenishment. All of the Company’s ALCO stores have point-of-service computer terminals that capture sales information and transmit such information to the Company’s data processing facilities where it is used to drive management, financial, and supply chain functions.
Store Expansion. The continued growth of the Company is dependent, in large part, upon the Company’s ability to open and operate new stores on a timely and profitable basis. The Company opened one store during fiscal 2014 and a total of five stores during fiscal 2013. While the Company believes that adequate sites are available for future store openings, the rate of new store openings is subject to various contingencies, many of which are beyond the Company’s control. These material contingencies include:
| · | the Company’s ability to hire, train, and retain qualified personnel; |
| · | the availability of adequate capital resources for us to purchase inventory, equipment, and fixtures and make other capital expenditures necessary for store expansion; and |
| · | the ability of our landlords and developers to find appropriate financing in the current credit market to develop property to be leased by the Company. |
Historically, we have been able to hire, train, and retain qualified personnel and we anticipate being able to do so in the future. In order to address the increase in demand for qualified management, the Company will continue to recruit for those interested in working and living in our communities. Once hired, the management personnel will complete an in-store, hands-on management training program coupled with e-learning modules to ensure operational efficiencies and align to the Company priorities. We believe this training process will allow the Company to see the benefits of prompt time-to-productivity, employee engagement and commitment, and overall employee retention.
We currently believe that we will have the capital resources necessary to purchase the inventory, equipment, and fixtures, and to fund the other capital expenditures necessary for future store expansions. If we lack such capital resources, however, it would limit our expansion plans and negatively impact our operations going forward. The Company has been working closely with multiple developers and landlords that the Company believes have the financial resources to develop property to be leased by the Company and hold such property as a long-term investment in their portfolios. If such developers and landlords do not have, and cannot obtain, the financial resources to develop and hold such property, it would limit our expansion plans and negatively impact our operations going forward.
Financial Risk: The Company closely monitors IRS Section 382 regarding technical change of control. This particular section of the tax code would place an annual limit on the Company’s right to use its net operating loss carry-forwards (“NOLs”) should the aggregate shift in 5% shareholders be more than 50% in the preceding three-year testing period or as a result of certain reorganizations (“Tripping Event”). The annual limitation approximates 3% of the Company’s market capitalization just prior to the Tripping Event. In the event of a Tripping Event, management believes the Company would still be able to utilize its NOLs prior to their expiration, albeit over a longer period of time.
In 2010, the “Patient Protection and Affordable Care Act” and the “Health Care and Education Affordability Reconciliation Act of 2010” (the “2010 Healthcare Acts”) were signed into law. This legislation expands health care coverage to many uninsured individuals and expands coverage for those already insured. The 2010 Healthcare Acts, as well as other healthcare reform legislation being considered by Congress and state legislatures, may have a negative impact on our business. This impact could increase our employee healthcare related costs. While the costs of the 2010 Healthcare Acts will occur after December 31, 2013, due to provisions of this legislation being phased in over time, changes to our healthcare cost structure could have an adverse effect on the Company’s financial condition. While the Company cannot currently project the full amount of providing health insurance to all employees or the penalties that would be imposed if the Company did not offer health care to all employees, the Company believes that a reasonable range of incremental costs could be between $1.0 and $4.0 million, annually.
On April 10, 2013, the Company issued a press release to announce the relocation of the Company’s corporate office from Abilene, Kansas to Coppell, Texas, a suburb of Dallas, Texas. On August 7, 2013, the Company received the certificate of occupancy for its corporate office in Coppell, TX. As of November 3, 2013, the transition of nearly all the Company’s administrative support functions had been completed. If the Company does not continue to execute its relocation plan properly and in accordance with budget constraints, then costs associated with such relocation may adversely affect the financial performance of the Company.
Recent Events.
| · | On October 30, 2013, the Company held a special meeting of its stockholders, to vote on the proposal to adopt the Agreement and Plan of Merger, dated as of July 25, 2013. The proposal to adopt the Merger Agreement did not receive approval from more than a majority of the outstanding shares of the Company’s common stock, and therefore was not approved by the Company’s Stockholders. As a result of the failure to receive such stockholder approval, on October 30, 2013, the Company delivered to Parent and Merger Sub a written notice (the “Termination Notice”) terminating the Merger Agreement in accordance with Section 7.2(b) of the Merger Agreement. As a result of the Termination Notice, the Merger Agreement was terminated and the merger contemplated thereby was abandoned. |
| · | On November 22, 2013, pursuant to Section 2.16 of the Facility, the Board of Directors unanimously approved a request to increase the revolving credit commitments of the Company by $10.0 million (the “Commitment Increase”); thereby, increasing the overall Facility from $120.0 million to $130.0 million. Except for the Commitment Increase, the Facility remains unchanged and in full force and effect. |
Key Items in the Third Quarter of Fiscal 2014.
The Company measures itself against a number of financial metrics to assess its performance. Some of the important financial items, from continuing operations, during the third quarter of fiscal 2014 were:
| · | Net sales from continuing operations during the third quarter of fiscal 2014 increased 0.7% to $106.7 million, compared to net sales during the third quarter of fiscal 2013 of $105.9 million. |
| · | Gross margin percentage is a key measure of the Company’s ability to maximize profit on the purchase and subsequent sale of merchandise, while minimizing promotional and clearance markdowns, shrinkage, damage and returns. Gross margin percentage is defined as net sales less cost of sales, expressed as a percentage of net sales. |
Gross margin, as a percentage of net sales, was 26.2% during the third quarter of fiscal 2014, compared to 31.1% during the third quarter of fiscal 2013.
| · | Selling, general and administrative expenses (“SG&A”) are a measure of the Company’s ability to manage and control its expenses to purchase, distribute and sell merchandise. |
SG&A as a percentage of net sales was 32.8% during the third quarter of fiscal 2014, compared to 30.1% during the third quarter of fiscal 2013. Included in SG&A are costs associated with the Company’s merger activity in the amount of $1.1 million during the third quarter of fiscal 2014 and $2.3 million for the thirty-nine weeks ended November 3, 2013.
| · | During the third quarter of fiscal 2014, the Company recorded a non-cash charge of $9.8 million attributable to a valuation allowance on the Company’s cumulative net deferred tax asset. The establishment of a valuation allowance does not have any impact on cash, nor does such an allowance preclude the Company from utilizing its loss carryforwards in the future. |
| · | Earnings per share (“EPS”) is an indicator of the returns generated for the Company’s stockholders. |
Net loss per diluted share for the third quarter of fiscal 2014 was $5.11, compared to a net loss per diluted share of $0.37 during third quarter of fiscal 2013.
RESULTS OF OPERATIONS
The following table sets forth the components of the Company’s statements of operations expressed as percentages of net sales:
| Thirteen Week Periods Ended | Thirty-Nine Week Periods Ended | |||||||||||||||
| November 3, 2013 | October 28, 2012 | November 3, 2013 | October 28, 2012 | |||||||||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
| Cost of sales | 73.8 | 68.9 | 70.8 | 68.9 | ||||||||||||
| Gross margin | 26.2 | 31.1 | 29.2 | 31.1 | ||||||||||||
| Selling, general and administrative | 32.8 | 30.1 | 29.9 | 28.6 | ||||||||||||
| Depreciation and amortization | 2.0 | 2.1 | 1.9 | 1.9 | ||||||||||||
| Total operating expenses | 34.8 | 32.2 | 31.8 | 30.5 | ||||||||||||
| Operating income (loss) from continuing operations | (8.6 | ) | (1.1 | ) | (2.6 | ) | 0.6 | |||||||||
| Interest expense | 0.8 | 0.8 | 0.8 | 0.7 | ||||||||||||
| Loss from continuing operations before income taxes | (9.4 | ) | (1.9 | ) | (3.4 | ) | (0.1 | ) | ||||||||
| Income tax expense (benefit) | 5.6 | (0.7 | ) | 1.6 | 0.0 | |||||||||||
| Loss from continuing operations | (15.0 | ) | (1.2 | ) | (5.0 | ) | (0.1 | ) | ||||||||
| Loss from discontinued operations, net of income tax benefit | (0.5 | ) | (0.2 | ) | (0.2 | ) | (0.2 | ) | ||||||||
| Net loss | (15.5 | )% | (1.4 | )% | (5.2 | )% | (0.3 | )% | ||||||||
Thirteen Weeks Ended November 3, 2013 Compared to Thirteen Weeks Ended October 28, 2012
Net sales from continuing operations, including the Company’s transactional website, during the third quarter of fiscal 2014 increased 0.7% to $106.7 million, compared to net sales during the third quarter of fiscal 2013 of $105.9 million. Net sales from the Company’s transactional website during the third quarter of fiscal 2014 were $25 thousand, a decrease of $6 thousand compared to the third quarter of fiscal 2013.
Net sales from same-stores, excluding the Company’s two fuel center locations, decreased 2.9%, or $3.0 million, to $101.1 million during the third quarter of fiscal 2014, compared to $104.1 million during the third quarter of fiscal 2013. The decrease in same-store sales was primarily due to a 4.0% decrease in customer transactions occurring at a same-store and partially offset by a 1.1% increase in the average sale per customer transaction occurring at a same-store.
Net sales from non-same stores during the third quarter of fiscal 2014 increased $2.0 million and net sales from the Company’s two fuel center locations during the third quarter of fiscal 2014 decreased $0.3 million.
Gross margin from continuing operations for the third quarter of fiscal 2014 decreased $5.0 million, or 15.2%, to $27.9 million compared to $32.9 million during the third quarter of fiscal 2013. As a percentage of net sales, gross margin was 26.2% and 31.1% during the third quarter of fiscal 2014 and fiscal 2013, respectively. Gross margin generated by non same-stores was $1.5 million during the third quarter of fiscal 2014.
Gross margin for the third quarter of fiscal 2014 was negatively impacted by higher promotional activity and partially offset by lower freight costs. Increased promotional activity during the third quarter of fiscal 2014 included an aggressive inventory reduction strategy, especially in certain discretionary categories such as apparel and home. Net freight costs during the third quarter of fiscal 2014 decreased $0.2 million, or 3.8%, to $4.0 million compared to $4.2 million during the third quarter of fiscal 2013. As a percentage of net sales, net freight costs were 3.8% and 4.0% during the third quarter of fiscal 2014 and fiscal 2013, respectively.
SG&A from continuing operations increased $3.2 million, or 10.1%, to $35.0 million during the third quarter of fiscal 2014, compared to $31.8 million during the third quarter of fiscal 2013. The increase in SG&A is primarily attributable to costs associated with merger activity of the Company ($1.1 million), increase in same-stores ($1.0 million), and increase due to new stores ($0.8 million). As a percentage of net sales, SG&A was 32.8% and 30.1% during the third quarter of fiscal 2014 and fiscal 2013, respectively. Excluding share-based compensation, costs associated with merger activity, and loss on sale of assets, SG&A was 31.7% and 29.9% of net sales for the third quarter of fiscal 2014 and fiscal 2013, respectively.
Depreciation and amortization expense from continuing operations decreased $0.1 million or 3.0% to $2.1 million during the third quarter of fiscal 2014 compared to $2.2 million during the third quarter of fiscal 2013.
Interest expense was $0.9 million during the third quarter for both fiscal 2014 and fiscal 2013. Excluding interest on capital lease obligations and amortization of debt financing costs, interest expense was $0.5 million during the third quarter for both fiscal 2014 and fiscal 2013.
Income tax expense on continuing operations was $6.0 million during the third quarter of fiscal 2014 compared to income tax benefit of $0.8 million during the third quarter of fiscal 2013. During the third quarter of fiscal 2014, the Company recorded a non-cash charge of $9.8 million attributable to a valuation allowance on the Company’s cumulative net deferred tax asset. Based on cumulative book, pre-tax loss over the 36 month period ended November 3, 2013, management concluded it is more likely than not, the Company will not realize the benefits of these deductible differences. The establishment of a valuation allowance does not have any impact on cash, nor does such an allowance preclude the Company from utilizing its loss carryforwards in the future. The effective tax rate was (59.4) % during the third quarter of fiscal 2014 compared to 40.5% during the third quarter of fiscal 2013.
Loss from continuing operations, including income tax expense, increased $14.9 million to $16.1 million during the third quarter of fiscal 2014 compared to loss from continuing operations, net of tax benefit, of $1.1 million during the third quarter of fiscal 2013. As a percentage of net sales, loss from continuing operations was 15.0% during the third quarter of fiscal 2014 compared to net loss of 1.2% during the third quarter of fiscal 2013.
Loss from discontinued operations, net of income tax benefit, was $0.6 million during the third quarter of fiscal 2014 compared to $0.2 million during the third quarter of fiscal 2013.
Thirty-Nine Weeks Ended November 3, 2013 Compared to Thirty-Nine Weeks Ended October 28, 2012
Net sales from continuing operations, including the Company’s transactional website, during the thirty-nine weeks ended November 3, 2013 increased 1.5% to $343.2 million, compared to net sales during the thirty-nine weeks ended October 28, 2012 of $338.2 million. Net sales from the Company’s transactional website during the thirty-nine weeks ended November 3, 2013 were $75 thousand, an increase of $31 thousand compared to the thirty-nine weeks ended October 28, 2012.
Net sales from same-stores, excluding the Company’s two fuel center locations, decreased 1.5%, or $5.0 million, to $327.6 million during the thirty-nine weeks ended November 3, 2013, compared to $332.6 million during the thirty-nine weeks ended October 28, 2012. The decrease in same-store sales was primarily due to a 5.0% decrease in customer transactions occurring at a same-store and partially offset by a 3.6% increase in the average sale per customer transaction occurring at a same-store.
Net sales from non-same stores during the thirty-nine weeks ended November 3, 2013 increased $8.5 million and net sales from the Company’s two fuel center locations during the thirty-nine weeks ended November 3, 2013 decreased $0.7 million.
Gross margin from continuing operations for the thirty-nine weeks ended November 3, 2013 decreased $5.0 million, or 4.7%, to $100.3 million compared to $105.3 million during the thirty-nine weeks ended October 28, 2012. As a percentage of net sales, gross margin was 29.2% and 31.1% during the thirty-nine weeks ended November 3, 2013 and October 28, 2012, respectively. Gross margin generated by non same-stores was $1.5 million during the thirty-nine weeks ended November 3, 2013.
Gross margin for the thirty-nine weeks ended November 3, 2013 was negatively impacted by higher promotional activity and higher net freight costs. Net freight costs during the thirty-nine weeks ended November 3, 2013 increased $0.3 million, or 3.1%, to $11.3 million compared to $11.0 million during the thirty-nine weeks ended October 28, 2012. As a percentage of net sales, net freight costs were 3.3% for both the thirty-nine weeks ended November 3, 2013 and October 28, 2012.
SG&A from continuing operations increased $5.9 million, or 6.1%, to $102.7 million during the thirty-nine weeks ended November 3, 2013, compared to $96.8 million during the thirty-nine weeks ended October 28, 2012. The net increase in SG&A is primarily attributable to costs associated with merger activity of the Company ($2.3 million), relocation of the Company’s corporate office ($0.6 million), increase in same-stores ($0.3 million), and new stores ($2.1 million). As a percentage of net sales, SG&A was 29.9% and 28.6% during the thirty-nine weeks ended November 3, 2013, and October 28, 2012, respectively. Excluding share-based compensation, office relocation, pending merger, and gain on sale of assets, SG&A was 29.0% and 28.5% of net sales for the thirty-nine weeks ended November 3, 2013 and October 28, 2012, respectively.
Depreciation and amortization expense from continuing operations increased $0.1 million or 1.3% to $6.4 million during the thirty-nine weeks ended November 3, 2013 compared to $6.3 million during the thirty-nine weeks ended October 28, 2012.
Interest expense increased $0.4 million, or 19.5%, to $2.9 million during the thirty-nine weeks ended November 3, 2013 compared to $2.4 million during the thirty-nine weeks ended October 28, 2012. Excluding interest on capital lease obligations and amortization of debt financing costs, interest expense was $1.7 million during the thirty-nine weeks ended November 3, 2013, compared to $1.3 million during the thirty-nine weeks ended October 28, 2012.
Income tax expense on continuing operations was $5.4 million during the thirty-nine weeks ended November 3, 2013 compared to income tax benefit of $0.1 million during the thirty-nine weeks ended October 28, 2012. During the thirty-nine weeks ended November 3, 2013, the Company recorded a non-cash charge of $9.8 million attributable to a valuation allowance on the Company’s cumulative net deferred tax asset. Based on cumulative book, pre-tax loss over the 36 month period ended November 3, 2013, management concluded it is more likely than not, the Company will not realize the benefits of these deductible differences. The establishment of a valuation allowance does not have any impact on cash, nor does such an allowance preclude the Company from utilizing its loss carryforwards in the future. The effective tax rate was (46.4) % during the thirty-nine weeks ended November 3, 2013 compared to 48.9% during the thirty-nine weeks ended October 28, 2012.
Loss from continuing operations, including income tax expense, was $17.0 million during the thirty-nine weeks ended November 3, 2013, compared to loss from continuing operations, net of income tax benefit, of $0.1 million during the thirty-nine weeks ended October 28, 2012. As a percentage of net sales, loss from continuing operations was 5.0% for the thirty-nine weeks ended November 3, 2013, as compared to net loss of 0.1% during the thirty-nine weeks ended October 28, 2012.
Loss from discontinued operations, net of income tax benefit, was $0.8 million and $0.6 million during the thirty-nine weeks ended November 3, 2013 and October 28, 2012, respectively.
Certain Non-GAAP Financial Measures
The Company has included adjusted SG&A and adjusted earnings before interest taxes depreciation and amortization (“EBITDA”), non-U.S. GAAP performance measures, as part of its disclosure as a means to enhance its communications with stockholders. Certain stockholders have specifically requested this information to assist them in comparing the Company to other retailers that disclose similar non-U.S. GAAP performance measures. Further, management utilizes these measures in internal evaluation, review of performance and to compare the Company’s financial measures to those of its peers. Adjusted EBITDA differs from the most comparable U.S. GAAP financial measure (earnings (loss) from continuing operations) in that it does not include certain items, as does Adjusted SG&A. These items are excluded by management as they are non-recurring and/or not relevant to analysis of ongoing business operations and to better evaluate normalized operational cash flow and expenses excluding unusual, inconsistent and non-cash charges. To compensate for the limitations of evaluating the Company’s performance using Adjusted SG&A and Adjusted EBITDA, management also utilizes U.S. GAAP performance measures such as gross margin, return on investment, return on equity and cash flow from operations. As a result, Adjusted SG&A and Adjusted EBITDA may not reflect important aspects of the results of the Company’s operations.
| Thirteen Week Periods Ended | Thirty-Nine Week Periods Ended | |||||||||||||||
November 3, 2013 | October 28, 2012 | November 3, 2013 | October 28, 2012 | |||||||||||||
| SG&A Expenses from Continuing Operations | ||||||||||||||||
Store support center (1) | $ | 6,615 | $ | 5,245 | $ | 18,737 | $ | 15,207 | ||||||||
| Distribution center | 1,564 | 1,667 | 4,733 | 5,087 | ||||||||||||
| 401K expense | 125 | — | 375 | — | ||||||||||||
Same-store SG&A (2) | 25,807 | 24,796 | 76,369 | 76,088 | ||||||||||||
Non same-store SG&A (3) | 814 | 26 | 2,135 | 66 | ||||||||||||
| Share-based compensation | 107 | 97 | 335 | 327 | ||||||||||||
| SG&A as reported | 35,032 | 31,831 | 102,684 | 96,775 | ||||||||||||
| (Less) add: | ||||||||||||||||
| Share-based compensation | (107 | ) | (97 | ) | (335 | ) | (327 | ) | ||||||||
Merger Activity (1) | (1,065 | ) | — | (2,273 | ) | — | ||||||||||
Office relocation (1) | — | — | (602 | ) | — | |||||||||||
Gain (loss) on sale of fixed assets (1) | — | (87 | ) | — | 4 | |||||||||||
| Adjusted SG&A from Continuing Operations | $ | 33,860 | $ | 31,647 | $ | 99,474 | $ | 96,452 | ||||||||
| Adjusted SG&A as % of sales | 31.7 | % | 29.9 | % | 29.0 | % | 28.5 | % | ||||||||
Sales per average selling square feet (4) | $ | 24.53 | $ | 24.63 | $ | 78.86 | $ | 79.05 | ||||||||
Gross Margin dollars per average selling square feet (4) | $ | 6.50 | $ | 7.78 | $ | 23.36 | $ | 25.00 | ||||||||
Adjusted SG&A per average selling square feet (4) | $ | 7.88 | $ | 7.47 | $ | 23.15 | $ | 22.89 | ||||||||
Adjusted EBITDA per average selling square feet (4)(5) | $ | (1.59 | ) | $ | 0.23 | $ | (0.06 | ) | $ | 1.92 | ||||||
Average inventory per average selling square feet (4)(6)(7) | $ | 37.30 | $ | 35.83 | $ | 35.95 | $ | 35.60 | ||||||||
Average selling square feet (4) | 4,296 | 4,235 | 4,296 | 4,214 | ||||||||||||
| Total stores operating beginning of period | 213 | 215 | 217 | 216 | ||||||||||||
| Total stores operating end of period | 210 | 215 | 210 | 215 | ||||||||||||
| Total stores less than twelve months old | 4 | 7 | 6 | 9 | ||||||||||||
| Total non-same stores | 4 | 7 | 6 | 9 | ||||||||||||
| Supplemental Data: | ||||||||||||||||
| Same-store gross margin dollar change | -19.7 | % | -2.1 | % | -8.2 | % | -0.7 | % | ||||||||
| Same-store SG&A dollar change | -4.5 | % | -3.8 | % | -0.8 | % | 0.0 | % | ||||||||
| Same-store total customer count change | -4.0 | % | -6.8 | % | -5.0 | % | -5.0 | % | ||||||||
| Same-store average sale per ticket change | 1.1 | % | 3.7 | % | 3.7 | % | 4.0 | % | ||||||||
(1) Store support center includes gain (loss) on disposal of fixed assets and costs associated with office relocation and merger activity.
(2) Same-stores are those stores which were open at the end of the reporting period, had reached their fourteenth month of operation, and include store locations, if any, that had experienced a remodel, an expansion, or relocation. Same-stores also include the Company’s transactional website.
(3) Non same-stores are those stores which have not reached their fourteenth month of operation.
(4) Average selling square feet is calculated as beginning square feet plus ending square feet divided by 2.
(5) Adjusted EBITDA per average selling square foot is calculated as Adjusted EBITDA divided by average selling square feet.
(6) Average store level merchandise inventory is calculated as beginning inventory plus ending inventory divided by 2.
(7) Excludes inventory for unopened stores.
Store support center expenses during the thirty-nine weeks ended November 3, 2013, increased $1.4 million, or 26.1%. The net increase was primarily due to costs associated with the Company’s merger activity ($1.1 million).
Reconciliation and Explanation of Non-U.S. GAAP Financial Measures
The following table shows the reconciliation of Adjusted EBITDA to net earnings (loss):
| 53 Weeks | Twenty-Six Week Periods Ended | Trailing 53 Weeks Ended | Thirteen Week Periods Ended | Trailing 53 Weeks Ended | ||||||||||||||||||||||||
| Fiscal 2013 | August 4, 2013 | July 29, 2012 | August 4, 2013 | November 3, 2013 | October 28, 2012 | November 3, 2013 | ||||||||||||||||||||||
| Net earnings (loss) | $ | 1,307 | (1,171 | ) | 700 | (564 | ) | (16,635 | ) | (1,373 | ) | (15,826 | ) | |||||||||||||||
| Plus: | ||||||||||||||||||||||||||||
| Interest | 3,477 | 2,010 | 1,536 | 3,951 | 852 | 859 | 3,944 | |||||||||||||||||||||
| Taxes | 311 | (703 | ) | 476 | (868 | ) | 5,627 | (919 | ) | 5,678 | ||||||||||||||||||
| Depreciation and amortization | 8,902 | 4,393 | 4,263 | 9,032 | 2,144 | 2,216 | 8,960 | |||||||||||||||||||||
| EBITDA | 13,997 | 4,529 | 6,975 | 11,551 | (8,012 | ) | 783 | 2,756 | ||||||||||||||||||||
| Plus: | ||||||||||||||||||||||||||||
| Share-based compensation | 381 | 228 | 230 | 379 | 107 | 97 | 389 | |||||||||||||||||||||
| Office relocation | — | 602 | — | 602 | — | — | 602 | |||||||||||||||||||||
| Merger activity | — | 1,208 | — | 1,208 | 1,065 | — | 2,273 | |||||||||||||||||||||
| (Gain) loss asset disposals | 141 | — | (91 | ) | 232 | — | 87 | 145 | ||||||||||||||||||||
| Adjusted EBITDA | 14,519 | 6,567 | 7,114 | 13,972 | (6,840 | ) | 967 | 6,165 | ||||||||||||||||||||
| Cash | 3,160 | 2,834 | 2,407 | 2,834 | 2,972 | 1,179 | 2,972 | |||||||||||||||||||||
| Debt | 79,962 | 97,757 | 56,567 | 97,757 | 94,029 | 74,745 | 94,029 | |||||||||||||||||||||
| Debt, net of cash | $ | 76,802 | 94,923 | 54,160 | 94,923 | 91,057 | 73,566 | 91,057 | ||||||||||||||||||||
Liquidity and Capital Resources
Working capital (defined as current assets less current liabilities) was $128.1 million and $132.6 million at the end of the third quarter of fiscal 2014 and fiscal 2013, respectively.
The Company’s primary sources of funds are cash flow from operations, borrowings under its revolving loan credit facility, and vendor trade credit financing. Short-term trade credit represents a significant source of financing for inventory to the Company. Trade credit arises from the willingness of the Company’s vendors to grant payment terms for inventory purchases.
Net cash provided by (used in) operating activities aggregated ($5.9) million and $5.2 million during the thirty-nine weeks ended November 3, 2013 and October 28, 2012, respectively. The $11.1 million net increase in cash used in operating activities resulted primarily from an increase in pre-tax loss for the thirty-nine weeks.
Net cash used in investing activities was $8.4 million and $8.0 million during the thirty-nine weeks ended November 3, 2013 and October 28, 2012, respectively. Excluding proceeds from sale of assets, net cash used in investing activities during the thirty-nine weeks ended November 3, 2013 totaled $8.5 million, compared to net cash used in investing activities during the thirty-nine weeks ended October 28, 2012 of $8.5 million. Net cash used in investing activities consisted primarily of capital expenditures. The Company’s long-range strategy is to grow its store count, and it intends to continue to invest in technology and migrate various system applications during the next 36 months.
On July 21, 2011, the Company entered into a five-year revolving Credit Agreement (the “Facility”) with Wells Fargo and Wells Capital Finance, LLC. The $120.0 million Facility replaced the Company’s previous $120.0 million credit facility with Bank of America, N.A. and Wells Fargo Retail Finance, LLC, and expires July 20, 2016.The Company uses its revolving loan credit facility and vendor trade credit financing to fund the buildup of inventories periodically during the year for its peak selling seasons and to meet other short-term cash requirements. The revolving loan credit facility provides up to $120 million of financing in the form of notes payable. The loan agreement expires July 20, 2016. The revolving loan note payable of $78.0 million together with outstanding letters of credit in the amount of $8.8 million, resulted in an available line of credit at that date of approximately $33.2 million, subject to a borrowing base calculation. Loan advances are secured by a security interest in the Company’s inventory and credit card receivables. The loan agreement contains various restrictions that are applicable when outstanding borrowings exceed $102.0 million, including limitations on additional indebtedness, prepayments, acquisition of assets, granting of liens, certain investments and payments of dividends. The Company’s loan agreement contains various covenants including limitations on additional indebtedness and certain financial tests, as well as various subjective acceleration clauses. The balance sheet classification of the borrowings under the revolving loan credit facility has been determined in accordance with ASC 470-10-45, Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that Include both a Subjective Acceleration Clause and a Lock-Box Arrangement. Accordingly, this obligation has been classified as a long-term liability in the accompanying balance sheet.
On November 22, 2013, pursuant to Section 2.16 of the Facility, the Board of Directors unanimously approved to request to increase the revolving credit commitments of the Company by $10.0 million (the “Commitment Increase”); thereby, increasing the overall Facility from $120.0 million to $130.0 million. Except for the Commitment Increase, the Facility remains unchanged and in full force and effect.
On July 27, 2012, the Company entered into a new Rule 10b5-1 and Rule 10b-18 Stock Repurchase Agreement with William Blair and Company, LLC (the “Stock Repurchase Agreement”) whereby the Company authorized the repurchase of up to 175,000 shares of the Company’s Common Stock under the Company’s stock repurchase program (the “Program”).
The Program was initially authorized by the Company on March 23, 2006, whereby the Board of Directors of the Company authorized the repurchase of 200,000 shares of the Company's Common Stock, and the Company repurchased 3,337 shares of Common Stock under the Program. The Company's Board of Directors reinstated the Program on August 13, 2008 and the Company repurchased 22,197 shares of Common Stock under the Program during such period of reinstatement. The Board of Directors of the Company approved the reinstatement of the Program again on January 6, 2012 and the Company repurchased an additional 34,407 shares of Common Stock during such reinstatement. On April 25, 2012, the Board of Directors of the Company authorized the Company to repurchase an additional 500,000 shares of Common Stock for a total of 700,000 shares of Common Stock authorized for repurchase under the Program. The Stock Repurchase Agreement only authorizes William Blair and Company, LLC to repurchase a portion of the total shares available for repurchase under the Program as stated above. Under the terms of the Program, the Company can terminate the proposed buy back at any time.
During the first quarter of fiscal 2013, the Company repurchased a total of 34,407 shares of Common Stock under the Program. All shares were repurchased at market prices and the Company’s policy is to apply the excess of purchase price over par value to additional paid-in capital, resulting in a decrease to additional paid-in capital of $0.3 million. As of August 4, 2013, the Company had repurchased a total of 610,462 shares under the Program since it was initially approved in 2006, and 89,538 shares of Common Stock were available to be repurchased by the Company.
Net cash provided by financing activities totaled $14.1 million and $1.4 million during the thirty-nine weeks ended November 3, 2013 and October 28, 2012, respectively. Net cash provided by financing activities during the thirty-nine weeks ended November 3, 2013 consisted of net borrowings under the revolving Credit Agreement. Net cash provided by financing activities during the thirty-nine weeks ended October 28, 2012 consisted of net borrowings under the revolving Credit Agreement, partially offset by borrowings for repurchase of Company stock. As such, stock repurchases during the thirty-nine weeks ended October 28, 2012 were funded by increases in the amount outstanding under the Company’s revolving credit agreement.
The following table sets forth the average revolver balance outstanding, the maximum amount outstanding at end of the fiscal periods, and amounts outstanding for each borrowing type:
| Thirteen Week Periods Ended | Thirty-Nine Week Periods Ended | |||||||||||||||
| November 3, 2013 | October 28, 2012 | November 3, 2013 | October 28, 2012 | |||||||||||||
| Maximum revolver balance outstanding during period | $ | 83,043 | 60,906 | $ | 91,551 | $ | 61,276 | |||||||||
| Average revolver balance outstanding during period | 80,266 | 55,185 | 78,332 | 52,039 | ||||||||||||
| Outstanding loan types at end of period: | ||||||||||||||||
| Revolving credit facility | 77,994 | 58,000 | 77,994 | 58,000 | ||||||||||||
| Letters of credit | 8,792 | 8,608 | 8,792 | 8,608 | ||||||||||||
On October 12, 2012, subsequent to a trade confirmation executed October 10, 2012 whereby the Company repurchased shares of its Common Stock, the Company notified Wells Fargo that immediately after giving effect to the share repurchase, the Consolidated Fixed Charge Coverage Ratio would not be greater than the required ratio per Section 7.06(c) of the Facility. On October 12, 2012, Wells Fargo issued its consent of the repurchase (the “WF Consent”); provided that the WF Consent automatically terminated in the event the repurchase was not consummated within 90 days of the date of consent.
On February 6, 2013, the Board of Directors of the Company unanimously approved a First Amendment (the “Amendment”) to its Credit Agreement with Wells Fargo amending Section 7.06(c) of the Credit Agreement to permit the Company, subject to certain conditions set forth in the Amendment, to repurchase, redeem or otherwise acquire Equity Interests issued by the Company not to exceed $1.0 million in the aggregate in each fiscal year. Under the Credit Agreement, “Equity Interests” is defined as all of the shares of the capital stock of a person and all of the other warrants, options or other rights of a person to purchase capital stock of such person. Such amendment was announced on Form 8-K filed by the Company with the SEC on February 12, 2013 and a copy of the Amendment is attached to such 8-K. Except to the extent specifically set forth in the WF Consent and the Amendment, no other consent, waiver of, or change in any of the terms, provisions or conditions of the Credit Agreement is intended or implied.
Our current projections indicate sufficient cash and cash flows are and will be available to meet the Company’s payment needs. As discussed under the heading “Item 1. Legal Proceedings” of Part II of this report, we are the subject of a legal proceeding, the outcome of which is uncertain. We believe there is no known trend, demand, commitment, event, or uncertainty that is reasonably likely to occur which would have a material effect on the Company’s financial condition, results of operation, or cash flows.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements that affect the Company’s current or future financial condition.
BUSINESS OPERATIONS
The Company’s business activities consist of the operation of ALCO stores.
The Company initiated a transactional web site during November 2011. In July 2012, the Company expanded the product selection on its website which now includes more than 20,000 items of high-quality merchandise. Products offered on the ALCOstores.com website include video games and electronics, housewares, appliances and furniture, health & beauty aids, baby goods, office supplies, automotive and sporting goods, and much more. As in traditional ALCO stores, consumers can choose from a wide range of well-known brand names. In addition, the website includes brands not found in the Company’s retail stores. Based on its immaterial results of operation, the transactional website has been aggregated with the operating results of the Company’s ALCO stores.
The following chart indicates the percentage of sales, excluding fuel sales, represented by each of our major product categories:
| Thirteen Week Periods Ended | Thirty-Nine Week Periods Ended | |||||||||||||||
| November 3, 2013 | October 28, 2012 | November 3, 2013 | October 28, 2012 | |||||||||||||
| Merchandise Category: | ||||||||||||||||
| Consumables and commodities | 40 | % | 38 | % | 37 | % | 36 | % | ||||||||
| Hardlines | 29 | % | 30 | % | 33 | % | 33 | % | ||||||||
| Apparel and accessories | 15 | % | 16 | % | 15 | % | 15 | % | ||||||||
| Home furnishings and décor | 16 | % | 16 | % | 15 | % | 16 | % | ||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report, to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to the Company’s management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining internal control over financial reporting as defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934, as amended. The Company’s internal control system is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of February 3, 2013 based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). As a result of this assessment, management concluded that the Company’s internal control over financial reporting was effective as of February 3, 2013.
(c) Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during fiscal 2013 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
(d) Report of Independent Registered Pubic Accounting Firm
Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this annual report.
On September 5, 2013, Advanced Advisors, a Company stockholder, filed a class action petition in the District Court of Shawnee County, Kansas (case no. 13C001007) citing, among other parties, the Company and the Company’s directors, Royce Winsten, Terrence Babilla, Dennis Logue, Lolan Mackey, and Richard Wilson, as defendants. The petition challenges the defendants’ actions in causing the Company to enter into the Merger Agreement under which Argonne Capital Group, LLC was to purchase all of the outstanding shares of the Company. The allegations against the defendants include breaches of fiduciary duties and the aiding and abetting of breaches of fiduciary duties. The amount of the damages is unspecified. The Company intends to vigorously defend itself.
On September 23, 2013, Paul Hughes, an individual Company stockholder, filed a class action petition in the District Court of Shawnee County, Kansas (case no. 13C001096) citing, among other parties, the Company and the Company’s directors, Royce Winsten, Terrence Babilla, Dennis Logue, Lolan Mackey, and Richard Wilson, as defendants. The petition challenges the defendants’ actions in causing the Company to enter into the Merger Agreement under which Argonne Capital Group, LLC was to purchase all of the outstanding shares of the Company. The allegations against the defendants include breaches of fiduciary duties and the aiding and abetting of breaches of fiduciary duties. The amount of the damages is unspecified. There is a dismissal hearing for this matter scheduled for January 10, 2014. The Company intends to vigorously defend itself.
On September 27, 2013, Jeffery R. Geygan, an individual Company stockholder, filed a class action petition in the District Court of Shawnee County, Kansas (case no. 13C001120) citing, among other parties, the Company and the Company’s directors, Royce Winsten, Terrence Babilla, Dennis Logue, Lolan Mackey, and Richard Wilson, as defendants. The petition challenges the defendants’ actions in causing the Company to enter into the Merger Agreement under which Argonne Capital Group, LLC was to purchase all of the outstanding shares of the Company. The allegations against the defendants include breaches of fiduciary duties and the aiding and abetting of breaches of fiduciary duties. The amount of the damages is unspecified. The parties have filed a joint motion to consolidate this case and the case filed by Advanced Advisors discussed above. The Company intends to vigorously defend itself.
Except for the risk factors discussed below, there have been no material changes to our risk factors as previously disclosed in our Form 10-K for the fiscal year ended February 3, 2013.
Decreases in Customer Discretionary Spending May Adversely Affect our Sales and Profitability
The lingering economic recession may continue to negatively affect our customers’ discretionary spending and thereby may negatively affect our sales and profitability. The Company believes that many of the Company’s customers are on fixed or low incomes and may have limited discretionary spending. Furthermore, many of our customers may have experienced financial hardship as a result of job losses, foreclosures or their inability to obtain short-term financing, all of which may negatively affect their ability to shop in our stores and buy our products. Reductions in our customers’ discretionary spending could cause our customers to shift their spending to products other than those sold by us or to products sold by us that are less profitable than other product choices, all of which could result in lower net sales, decreases in inventory turnover, greater markdowns on inventory, and a reduction in profitability due to lower margins.
The Company is in an Increasingly Competitive Industry
Due to the continued economic slowdown, the discount retail industry has become highly competitive. This competitive environment subjects the Company to a risk of reduced profitability because every day lower prices and greater markdowns on inventory, which are required to maintain the Company’s position in the industry, may result in lower margins. Our competitors may also use competitive and costly marketing strategies which the Company may need to respond to in order to maintain its position in the industry.
On July 27, 2012, the Company entered into a new Rule 10b5-1 and Rule 10b-18 Stock Repurchase Agreement with William Blair and Company, LLC (the “Stock Repurchase Agreement”) whereby the Company authorized the repurchase of up to 175,000 shares of the Company’s Common Stock under the Company’s stock repurchase program (the “Program”).
The Program was initially authorized by the Company on March 23, 2006, whereby the Board of Directors of the Company authorized the repurchase of 200,000 shares of the Company's Common Stock, and the Company repurchased 3,337 shares of Common Stock under the Program. The Company's Board of Directors reinstated the Program on August 13, 2008 and the Company repurchased 22,197 shares of Common Stock under the Program during such period of reinstatement. The Board of Directors of the Company approved the reinstatement of the Program again on January 6, 2012 and the Company repurchased an additional 34,407 shares of Common Stock during such reinstatement. On April 25, 2012, the Board of Directors of the Company authorized the Company to repurchase an additional 500,000 shares of Common Stock for a total of 700,000 shares of Common Stock authorized for repurchase under the Program. The Stock Repurchase Agreement only authorizes William Blair and Company, LLC to repurchase a portion of the total shares available for repurchase under the Program as stated above. Under the terms of the Program, the Company can terminate the proposed buy back at any time.
During fiscal 2013, the Company repurchased a total of 584,928 shares of Common Stock under the Program. All shares were repurchased at market prices and the Company’s policy is to apply the excess of purchase price over par value to additional paid-in capital, resulting in a decrease to additional paid-in capital of $4.0 million. As of February 3, 2013, the Company repurchased a total of 610,462 shares under the Program since it was initially approved in 2006. Therefore, there were 89,538 shares of Common Stock available to be repurchased by the Company, as of February 3, 2013.
As of December 17, 2013, the Company had not repurchased additional shares subsequent to February 3, 2013.
Company Repurchases of Common Stock
| Period | Number of Shares Purchased | Weighted Average Price Paid Per Share | Total Number of Shares Purchased as Part Of Publicly Announced Plans or Programs | Total Number of Shares Authorized for Repurchase | Maximum Number of Shares that May Yet Be Purchased Under The Plans or Programs | |||||||||||||||
| As of February 3, 2013 | 610,462 | $ | 7.12 | 610,462 | 700,000 | 89,538 | ||||||||||||||
| First quarter | — | — | — | — | — | |||||||||||||||
| Second quarter | — | — | — | — | — | |||||||||||||||
| Third quarter: | ||||||||||||||||||||
| Month 1 | — | — | — | — | — | |||||||||||||||
| Month 2 | — | — | — | — | — | |||||||||||||||
| Month 3 | — | — | — | — | — | |||||||||||||||
| As of November 3, 2013 | 610,462 | $ | 7.12 | 610,462 | 700,000 | 89,538 | ||||||||||||||
Other than routine litigation from time to time in the ordinary course of business, the Company is not a party to any material litigation.
Not applicable.
None.
The following exhibits are filed or furnished with this Quarterly Report:
| Number | Description | |
| 3.1 | Articles of Incorporation of ALCO Stores, Inc., amended as of June 13, 1994 and restated solely for filing with the Securities and Exchange Commission (filed as Exhibit 3.1 to Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 1, 2004 and incorporated herein by reference). | |
| 3.2 | Amended and Restated Bylaws of ALCO Stores, Inc. is incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on June 27, 2011. | |
| 3.3 | Certificate of Amendment to the Articles of Incorporation of ALCO Stores, Inc. is incorporated herein by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed on June 29, 2012. | |
| 4.1 | Specimen of ALCO Stores, Inc. Common Stock Certificate (filed as Exhibit 4.1 to Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 3, 2008 and incorporated herein by reference). | |
| 4.2 | Reference is made to the Amended and Restated Articles of Incorporation described under 3.1 above and the Amended and Restated Bylaws described under 3.2 above and the Certificate of Amendment to the Articles of Incorporation described under 3.3 above. | |
| 10.1 | Stock Option Agreement between the Company and Tom Canfield, Jr. dated September 16, 2009 is incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of the Company dated September 24, 2009. | |
| 10.2 | Employment Agreement dated February 11, 2010 between the Company and Richard E. Wilson is incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of the Company dated February 25, 2010. | |
| 10.3 | Stock Option Agreement, dated February 11, 2010, between the Company and Richard E. Wilson is incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of the Company dated February 25, 2010. | |
| 10.4 | Stock Option Agreement dated September 20, 2010 between the Company and Wayne S. Peterson is incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K of the Company dated September 22, 2010. | |
| 10.5 | Indemnification Agreements between the Company and Royce Winsten, Raymond A.D. French, Lolan C. Mackey and Dennis E. Logue all dated June 14, 2010 incorporated herein by reference to Exhibit 10.5 on Current Report Form 8-K filed by the Company on June 18, 2010. | |
| 10.6 | Indemnification Agreement between the Company and Richard E. Wilson dated August 24, 2010 incorporated herein by reference to Exhibit 10.6 on Current Report Form 8-K of the Company dated August 27, 2010. | |
| 10.7 | Indemnification Agreement between the Company and Terrence M. Babilla dated September 2, 2010 incorporated herein by reference to Exhibit 10.7 on Current Report Form 8-K of the Company dated September 9, 2010 | |
| 10.8 | Stock Option Agreement between the Company and Terrence M. Babilla dated September 10, 2010 incorporated herein by reference to Exhibit 10.8 to Current Report Form 8-K of the Company dated September 16, 2010. | |
| 10.9 | Credit Agreement dated July 21, 2011, between ALCO Stores, Inc. and Wells Fargo Bank, National Association incorporated by reference to Exhibit 10.9 on Current Report Form 8-K of the Company dated July 27, 2011. | |
| 10.10 | Independent Director Compensation Policy is incorporated by reference to Exhibit 10.10 to the Current Report on Form 8-K of the Company dated June 27, 2011. | |
| 10.11 | Employment Agreement dated September 20, 2010 between the Company and Wayne S. Peterson is incorporated by reference to Exhibit 10.11 to the Current Report on Form 8-K of the Company dated September 22, 2010. | |
| 10.12 | Employment agreement entered into by the Company and Wayne S. Peterson dated March 15, 2012 is incorporated by reference to Exhibit 10.12 to the Company's Current Report on Form 8-K dated March 22, 2012. |
| 10.13 | Employment agreement entered into by the Company and Tom L. Canfield, Jr. dated March 15, 2012 is incorporated by reference to Exhibit 10.13 to the Company's Current Report on Form 8-K dated March 22, 2012. | |
| 10.14 | Stock Option Agreement between the Company and Wayne S. Peterson dated April 30, 2012 incorporated herein by reference to Exhibit 10.14 to Current Report Form 8-K of the Company dated May 3, 2012. | |
| 10.15 | Stock Option Agreement between the Company and Tom L. Canfield, Jr. dated April 30, 2012 incorporated herein by reference to Exhibit 10.15 to Current Report Form 8-K of the Company dated May 3, 2012. | |
| 10.16 | Stock Option Agreement between the Company and Dennis E. Logue dated June 29, 2012 incorporated herein by reference to Exhibit 10.16 to Current Report Form 8-K of the Company dated July 10, 2012. | |
| 10.17 | Stock Option Agreement between the Company and Terrence M. Babilla dated June 29, 2012 incorporated herein by reference to Exhibit 10.17 to Current Report Form 8-K of the Company dated July 10, 2012. |
| 10.18 | Stock Option Agreement between the Company and Lolan C. Mackey dated June 29, 2012 incorporated herein by reference to Exhibit 10.18 to Current Report Form 8-K of the Company dated July 10, 2012. | |
| 10.19 | Stock Option Agreement between the Company and Royce Winsten dated June 29, 2012 incorporated herein by reference to Exhibit 10.19 to Current Report Form 8-K of the Company dated July 10, 2012. | |
| 10.20 | 2012 Equity Incentive Plan is incorporated by reference to Exhibit 10.20 to the Form S-8 of the Company dated July 11, 2012. | |
| 10.21 | Incentive Bonus Plan is incorporated by reference to Exhibit 10.21 to the Current Report on Form 8-K of the Company dated July 13, 2012. | |
| 10.22 | Employment agreement entered into by the Company and Brent A. Streit dated March 15, 2012 is incorporated by reference to Exhibit 10.22 to the Company's Current Report on Form 8-K dated July 13, 2012. | |
| 10.23 | Time Based Incentive Stock Option Agreement between the Company and Richard E. Wilson dated July 6, 2012 incorporated herein by reference to Exhibit 10.23 to Current Report Form 8-K of the Company dated July 13, 2012. | |
| 10.24 | Performance Based Incentive Stock Option Agreement between the Company and Richard E. Wilson dated July 6, 2012 incorporated herein by reference to Exhibit 10.24 to Current Report Form 8-K of the Company dated July 13, 2012. | |
| 10.25 | Time Based Incentive Stock Option Agreement between the Company and Wayne S. Peterson dated July 6, 2012 incorporated herein by reference to Exhibit 10.25 to Current Report Form 8-K of the Company dated July 13, 2012. | |
| 10.26 | Performance Based Incentive Stock Option Agreement between the Company and Wayne S. Peterson dated July 6, 2012 incorporated herein by reference to Exhibit 10.26 to Current Report 8-K of the Company dated July 13, 2012. | |
| 10.27 | Time Based Incentive Stock Option Agreements between the Company and Tom L. Canfield dated July 6, 2012 incorporated herein by reference to Exhibit 10.27 to Current Report Form 8-K of the Company dated July 13, 2012. | |
| 10.28 | Performance Based Incentive Stock Option Agreements between the Company and Tom L. Canfield dated July 6, 2012 incorporated herein by reference to Exhibit 10.28 to Current Report Form 8-K of the Company dated July 13, 2012. | |
| 10.29 | Time Based Incentive Stock Option Agreements between the Company and Brent A. Streit dated July 6, 2012 incorporated herein by reference to Exhibit 10.29 to Current Report Form 8-K of the Company dated July 13, 2012. | |
| 10.30 | Performance Based Incentive Stock Option Agreements between the Company and Brent A. Streit dated July 6, 2012 incorporated herein by reference to Exhibit 10.30 to Current Report Form 8-K of the Company dated July 13, 2012. | |
| 10.31 | Appointment of new independent registered public accounting firm incorporated herein by reference to Exhibit 10.31 to Current Report Form 8-K of the Company dated July 17, 2012. | |
| 10.32 | Resignation of Officer. On October 5, 2012, Edmond C. Beaith resigned from the Company and such resignation is incorporated by reference to Exhibit 10.32 to the Current Report on Form 8-K of the Company dated October 11, 2012. | |
| 10.33 | First Amendment to the Credit Agreement, described under 10.11 above, dated February 6, 2013 and incorporated by reference to Exhibit 10.33 to the Current Report on Form 8-K of the Company dated February 12, 2013. | |
| 10.34 | Time Announcement to relocate the Company’s corporate headquarters from Abilene, Kansas to Coppell, Texas, a suburb of Dallas, Texas incorporated by reference to Exhibit 10.34 to the Current Report on Form 8-K of the Company dated April 10, 2013. | |
| 10.35 | Rights Agreement entered into between the Company and Computershare Trust Company, N.A. dated May 3, 2013 incorporated herein by reference to Exhibit 10.35 to Current Report on Form 8-K of the Company dated May 6, 2013. | |
| 10.36 | Lease Agreement entered into between the Company and IIT Freeport Office LP incorporated by reference to Exhibit 10.36 to Current Report on Form 8-K of the Company dated May 8, 2013. |
| 10.37 | Incentive Bonus Plan is incorporated by reference to Exhibit 10.37 to the Current Report on Form 8-K of the Company dated May 31, 2013. | |
| 10.38 | Employment agreement entered into by the Company and Ricardo A. Clemente dated May 24, 2013 is incorporated by reference to Exhibit 10.38 to the Company's Current Report on Form 8-K dated May 31, 2013. | |
| 10.39 | Time Based Incentive Stock Option Agreement entered into between the Company and Richard E. Wilson dated May 24, 2013 is incorporated by reference to Exhibit 10.39 to the Company’s Current Report on Form 8-K dated May 31, 2013. | |
| 10.40 | Restricted Stock Agreement entered into between the Company and Richard E. Wilson dated May 24, 2013 is incorporated by reference to Exhibit 10.40 to the Company’s Current Report on Form 8-K dated May 31, 2013. | |
| 10.41 | Time Based Incentive Stock Option Agreement entered into between the Company and Wayne S. Peterson dated May 24, 2013 is incorporated by reference to Exhibit 10.41 to the Company’s Current Report on Form 8-K dated May 31, 2013. |
| 10.42 | Restricted Stock Agreement entered into between the Company and Wayne S. Peterson dated May 24, 2013 is incorporated by reference to Exhibit 10.42 to the Company’s Current Report on Form 8-K dated May 31, 2013. | |
| 10.43 | Time Based Incentive Stock Option Agreement entered into between the Company and Tom L. Canfield, Jr. dated May 24, 2013 is incorporated by reference to Exhibit 10.43 to the Company’s Current Report on Form 8-K dated May 31, 2013. | |
| 10.44 | Restricted Stock Agreement entered into between the Company and Tom L. Canfield, Jr. dated May 24, 2013 is incorporated by reference to Exhibit 10.44 to the Company’s Current Report on Form 8-K dated May 31, 2013. | |
| 10.45 | Time Based Incentive Stock Option Agreement entered into between the Company and Brent A. Streit dated May 24, 2013 is incorporated by reference to Exhibit 10.45 to the Company’s Current Report on Form 8-K dated May 31, 2013. | |
| 10.46 | Restricted Stock Agreement entered into between the Company and Brent A. Streit dated May 24, 2013 is incorporated by reference to Exhibit 10.46 to the Company’s Current Report on Form 8-K dated May 31, 2013. | |
| 10.47 | Time Based Incentive Stock Option Agreement entered into between the Company and Ricardo A. Clemente dated May 24, 2013 is incorporated by reference to Exhibit 10.47 to the Company’s Current Report on Form 8-K dated May 31, 2013. | |
| 10.48 | Restricted Stock Agreement entered into between the Company and Ricardo A. Clemente dated May 24, 2013 is incorporated by reference to Exhibit 10.48 to the Company’s Current Report on Form 8-K dated May 31, 2013. | |
| 10.49 | Stock Option Award to Royce Winsten, the chairman of the Board of Directors, incorporated herein by reference to Exhibit 10.49 to the Company’s Current Report on Form 8-K dated May 31, 2013. | |
| 10.50 | Stock Option Agreement between the Company and Royce Winsten dated July 1, 2013 incorporated herein by reference to Exhibit 10.50 to the Company’s Current Report on Form 8-K dated July 8, 2013. | |
| 10.51 | Stock Option Agreement between the Company and Terrence M. Babilla dated July 1, 2013 incorporated herein by reference to Exhibit 10.51 to the Company’s Current Report on Form 8-K dated July 8, 2013. | |
| 10.52 | Stock Option Agreement between the Company and Dennis E. Logue dated July 1, 2013 incorporated herein by reference to Exhibit 10.52 to the Company’s Current Report on Form 8-K dated July 8, 2013. | |
| 10.53 | Stock Option Agreement between the Company and Lolan C. Mackey dated July 1, 2013 incorporated herein by reference to Exhibit 10.53 to the Company’s Current Report on Form 8-K dated July 8, 2013. | |
| 10.54 | Agreement and Plan of Merger dated July 25, 2013 incorporated herein by reference to Exhibit 10.54 to the Company’s Current Report on Form 8-K dated July 25, 2013. | |
| 10.55 | Proposal to acquire outstanding shares of the Company incorporated herein by reference to Exhibit 10.55 to Schedule 13D/A dated August 15, 2013. | |
| 10.56 | Preliminary Proxy Statement incorporated herein by reference to Exhibit 10.56 to Schedule 14A dated August 15, 2013. | |
| 10.57 | Acquisition Proposal incorporated herein by reference to Exhibit 10.57 to Schedule 13D/A dated August 27, 2013. | |
| 10.58 | Supplemental Letter incorporated herein by reference to Exhibit 10.58 to Schedule 13D/A dated August 29, 2013. | |
| 10.59 | Definitive Acquisition Proposal incorporated herein by reference to Exhibit 10.59 to Schedule 13D/A dated September 10, 2013. |
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| 10.60 | Press release regarding the Definitive Acquisition Proposal incorporated herein by reference to Exhibit 10.60 to Current Report Form 8-K dated September 11, 2013. | |
| 10.61 | Notice of special meeting of Company’s stockholders to vote on proposal to adopt the Agreement and Plan of Merger is incorporated by reference to Exhibit 10.61 to the Company’s Current Report on Form 8-K dated October 30, 2013. | |
| Schedule of change in same-store sales and same-store gross margin dollars. | ||
| 18.1 | Retail Accounting Change Preferability Letter from Independent Registered Public Accounting Firm is incorporated by reference to the Company’s Annual Report on Form 10-K dated April 13, 2012. | |
| Certification of Chief Executive Officer of ALCO Stores, Inc., dated December 18, 2013, pursuant to Rule 13a-4(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| Certification of Chief Financial Officer of ALCO Stores, Inc., dated December 18, 2013, pursuant to Rule 13a-4(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| Certification of Chief Executive Officer of ALCO Stores, Inc., dated December 18, 2013, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, which is furnished with this Annual Report on Form 10-K and is not treated as filed in reliance upon § 601(b)(32) of Regulations S-K. | ||
| Certification of Chief Financial Officer of ALCO Stores, Inc., dated December 18, 2013, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, which is furnished with this Annual Report on Form 10-K and is not treated as filed in reliance upon § 601(b)(32) of Regulations S-K. |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
| Signature and Title | Date | |
| /s/ Richard E. Wilson | December 18, 2013 | |
| Richard E. Wilson | ||
| President and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
/s/ Wayne S. Peterson | December 18, 2013 | |
| Wayne S. Peterson | ||
| Senior Vice President - Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) |
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